Big Picture

Euro worries flare-up, risk is “off”, Spanish bank nationalization

The European debt crisis moved back to centre stage this week following the election of anti-austerity politicians in Greece and France last weekend. The situation in Greece is most tenuous but it’s the possibility of Spain defaulting that has investors on edge as its economy is far larger.

Market reaction was initially muted Monday but selling gathered steam the following two days. Risk “on” assets were particularly hard hit with everything from equities to commodity prices sharply falling as investors moved into risk “off” assets such as the US dollar and Treasuries. Oil and gold prices were caught in the downdraft with the price of crude slipping to its lowest level of the year just above US$96 a barrel Wednesday. Gold also notched its low for the year Wednesday falling to just under $1,600 an ounce. Margin calls further accelerated the declines on commodity markets.

Thursday brought much needed relief on both Greek and Spanish fronts. In Greece, word that the former finance minister was hoping to form a coalition government and keep Greece in the euro-zone buoyed investors, as did word that the Spanish government had nationalized one of its largest banks.

Markets

North American markets sagging in May

The S&P/TSX reflected the souring sentiment falling from 11,871 to 11,736 over the four days. Thursday was, in fact, the first positive day for Canada’s benchmark index since the start of May, up 61 points. New York markets faced similarly tough going with the Dow, S&P 500 and NASDAQ indexes losing ground over the four sessions. At the close Thursday, the Dow managed to eke out a gain snapping a six-day losing streak but was still down falling from 13,038 Monday to 12,855. The S&P 500 fell from 1,369 to 1,357 and the NASDAQ dropped from 2,964 to 2,933 over the four days.

Our Recommendation

Further U.S. equity market weakness expected, but presents opportunity

• Equities. Steve Uzielli, Portfolio Manager, Portfolio Advisory Group (PAG) wrote: “Fundamentals for equities remain largely positive as evidenced by corporate earnings results, supported by low interest rates, solid balance sheets, and historically attractive valuations; however, macro events will continue to overshadow market activity and equities are likely to remain in a sideways trading pattern.”

• Fixed income. Andrew Mystic, Associate Director, PAG, highlights the following recommendations: “Term Call – given the recent decline in yields, we no longer see value in the mid-to-long end of the curve and recommend investors stay short at this time. Sector Call – underweight Canada, overweight Municipals, Provincials and Corporates. Currency Call – we recommend Canadian investors remain in Canadian dollars for their fixed income holdings. Alternative Strategies – new call – marketweight high yield, marketweight Emerging Markets Debt, underweight inflation protected debt.”

• Portfolio strategy. Scotia Capital Portfolio Strategist Vincent Delisle says: “Slowing U.S. payroll gains and euro political uncertainty have hurt risk appetite since the start of Q2 in what appears to be a repeat of last year's spring/summer equity correction.”

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